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AcknowledgementsThis report has been a truly collaborative effort from the very beginning, and thatcollaboration extends well beyond the six authors on the cover. We are pleased toacknowledge the contributions of a number of individuals and institutions, whohelped to shape our thinking on natural resources and make this year not onlyproductive but also enjoyable.During a study visit in October 2011, we enjoyed fruitful conversations in theUnited Kingdom at Chatham House, RUSI, EUCERS/King’s College, McKinseyGlobal Institute, Oxford University, and Statoil, and in Norway at the FridtjofNansen Institute, PRIO, and CICERO. We are especially grateful to Knut Alfsen,Steinar Andresen, Pavel Baev, Petra Dolata, Per Ove Eikeland, Tobias Feakin, CarolaGegenbauer, Jaakko Kooroshy, Bernice Lee, Indra Overland, Felix Preston, CameronRennie, Paul Stevens, Olav Schram Stokke, Fraser Thompson, and Marc Zornes fortheir time and insights.During the formative stages of the report, we benefitted from the insights ofcolleagues at workshops hosted at the Transatlantic Academy. Special thanks go toscholars from the Munk School of Global Affairs and the University of Toronto,especially Tom Axworthy, Peter Gourevitch, Franklyn Griffiths, Randall Hansen,Danny Harvey, Matthew Hoffmann, and Janice Gross Stein. We also thankcontributors to a conference on “Climate, Resource Security, and the Struggle forWater and Land,” including Willem Ligtvoet, Ton Manders, Ephraim Nkonya,Stephan Slingerland, and Farhana Sultana.We would like to extend individual acknowledgments also to Mathew Burrows,Geoff Dabelko, Monika Dittrich, Paul Faeth, John Allen Gay, Kristen JohnstonWooten, Marc Levy, Tom Mahnken, John Maurer, Jonas Meckling, David Menzie,Bill Moomaw, Charles Perry, John Reilly, Paul Saunders, Ryan Savage, and NinaSmidt. We would also like to thank the Infographics Lab at the University of Oregon,especially Jim Meacham and Alethea Steingisser. Our colleagues at the GermanMarshall Fund of the United States have been exceptionally generous with their timeand expertise, and we thank in particular Michal Baranowski, Christine Chumbler,Michael Dozler, Dhruva Jaishanker, Cathleen Kelly, Thomas Legge, Ian Lesser, JohnLoomis, Andrew Michta, Tessa Paganini, Christina Paulos, Aleksandra Przygoda, JoshRaisher, Andrew Small, Dan Twining, and Dymphna van der Lans.We are pleased to acknowledge the support of the Transatlantic Academy. A numberof short-term fellows at the Academy provided invaluable input at various stages, andwe thank Brahma Chellaney, Jim Cust, David Humphreys, Stormy-Annika Mildner,Paolo Natali, Andras Racz, and Klaus Scharioth for the intellectual enrichment theyprovided. Last but certainly not least, we express our deep gratitude to Nick Siegel andJessica Hirsch for all of their help, and Steve Szabo, the Academy’s executive director,for making this collaboration possible.ii Transatlantic Academy

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From theExecutive DirectorI n 2012, the United States, European Union, and Japan will take China to the WTO over Beijing’s rare earths policies. This is an example of how disputes between states over natural resources can be addressed within a structured, law-basedsystem. Less certain is whether this process will deliver results in time, and whatwill happen in hot spot areas around the world such as the South China Sea, wherethe navies of several nations have recently faced off over access to hydrocarbonresources and fisheries, or Yemen, where fresh water supplies are running outjust as the country, located astride some of the world’s busiest shipping lanes, isin the midst of an intractable political crisis. In the Eastern Mediterranean — thetransatlantic community’s own backyard — Israel, Lebanon, Cyprus, and Turkey areat odds over the ownership of recently discovered off-shore gas resources that couldbecome critical sources for the European Union. Even within states in many partsof the world, resource struggles can be seen in ballooning megacities, or in the massmigration caused by climate change and misallocated resources. Natural resources,and the struggles for land, energy, food, water, and minerals, truly represent a nexusof challenges for the transatlantic community. Yet there are also opportunities if wecan show leadership, from gains in resource efficiency and greener growth, to thechance to stave off potentially disastrous conflicts.This report represents the collective efforts of the fourth group of Academy fellows,who over the 2011-2012 fellowship year examined the theme Natural Resources: TheNew Geopolitical Great Game? It also builds on the work of the 2010-2011 fellows,who looked at the implications of the ongoing shift of economic and political powerto non-Western regions, most dramatically toward Asia and especially China. Thisreport is the product of the research of full-time academic fellows, informed bycontributions from the Bosch Public Policy Fellows, Compagnia di San Paolo Fellow,and Volkswagen Stiftung Fellow, who were in residence at the Academy for shorterperiods and provided practitioners’ perspectives. The fellows engaged in an intensivecollaborative research environment in which they presented their work and critiquedthe work of their colleagues. They interacted with a wide range of experts andpolicymakers in the United States, Canada, and Europe as they shaped the researchfor this report.The Academy would like to acknowledge the support of its donors in making thisstudy and the broader Academy possible. It was thanks to their support that thefellows were able to spend nine months in Washington working collaborativelyThe Global Resource Nexus v

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on this theme, including study trips to Great Britain, Norway, Belgium, Germany,and Poland, and in numerous workshops and discussions with academics, policyanalysts, business people, journalists, and government officials in North America andEurope. As was the case with the previous reports, we hope this report helps bridgethe Atlantic policy and academic communities, and makes a contribution to thetransatlantic dialogue on the nature and implications of these new global trends.Sincerely,Stephen F. SzaboExecutive DirectorThe Transatlantic Academyvi Transatlantic Academy

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Executive SummaryU nless the transatlantic community takes the lead in addressing the challenges arising from the unprecedented global demand for land, energy, food, water, and minerals, severe market disruptions are likely to occur, as are increasedchances of violent conflict at interstate and local levels in many “hot spots,” especiallyin Asia, Africa, and Latin America.Over the next 10-20 years, the world is likely to see accelerating demand for mostnatural resource commodities, as well as increasingly volatile markets. Scarcities arelikely to be more common. Resource or material scarcities, as experienced by states,firms, or populations, arise primarily from failures of governance rather than froma physical shortage of resources or materials. Yet natural resource governance facesincreasing complexity, especially when the linkages and inter-dependencies betweendifferent resources are considered. This study identifies a growing number of theselinkages and elaborates on the challenges, dangers, and opportunities that will arisefor the transatlantic community from the nexus of land, energy, food, water andminerals.The Resource NexusThe resource nexus originates in the interconnections between different resources, forexample from the requirement of one resource as an input to produce another or fromthe substitutability of two or more resources. Actions taken by governments, firms,or communities affecting one resource often have consequences for other resources,in the same locale or on the other side of the world. These consequences often takethe form of scarcity, environmental degradation, or destruction of livelihoods. Anumber of factors render the threats of today more pressing and more complex thanthe concerns about resource limits in the 1970s: the scale and rate of global ecologicalchanges, the emergence of new global players with political and economic weight, andthe growth of the resource-hungry middle classes. Attempts to govern the resourcenexus more effectively are constrained by the low awareness among the public andpolicymakers, persistent over-consumption in western societies, the inflexibility andinadequacy of many existing institutions, and by the “stove-piped” structure of theinstitutional landscape and of the policy debates that are too often focused on singleresources rather than on resource interconnections.The Global Resource Nexus vii

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The report identifies three realms of the resource nexus:• Markets: Markets for resources operate at local, regional, and global levels along commodity chains. These markets transmit effects between resources and between regions in an unprecedented way (e.g. between energy and minerals in the case of lithium, and between food and energy in the case of biofuels). Poor transparency prevents the effective management of resources through their life cycle in a sustainable manner. Risks of illicit trade exacerbate common future risks of high and volatile prices and abrupt interruptions of supply chains. Examples include phosphorus, biofuels, coltan, unconventional energy resources, water management, and poor incentives for recycling, reuse, and increased material efficiency.• State interests and inter-state relations: Many resources straddle national boundaries. Powerful state actors may choose to exploit these resources unilaterally rather than engaging in transnational governance institutions to manage the resource more equitably. Such actions raise the risk of violent conflict. Water is a major focus of such tensions. Several maritime disputes remain unresolved and involve hydrocarbon resources and fisheries, notably in the East and South China Seas, the Eastern Mediterranean, and the South Atlantic. Dam building by upstream states on major rivers threatens the livelihoods of populations in downstream states in South and Southeast Asia and along the Nile, for example. Finally, climate change threatens to destabilize weak and highly vulnerable states and societies.• Local human security: Many urban and rural communities struggle to manage the resource nexus at a local level. Access to water, food, land, and energy are central challenges in people’s everyday lives in the resource nexus on the ground. Resource depletion and environmental degradation can lead to local competition for resources, migration, violence, terrorism, and the emergence of ungovernable spaces, with the potential for international repercussions. Water provision for growing mega-cities, for example, competes with agricultural and mining uses, while climate change threatens rural livelihoods.Transatlantic Responsibilities and OpportunitiesThe interconnectedness of global resource challenges presents threats to transatlanticactors and interests, including those associated with supply chain interruptions andincreased economic volatility, risks of interstate and local conflicts and violence,and increased poverty and declines in human security. Yet, a host of opportunitiesfor transatlantic leadership are also identifiable, such as major gains in resourceefficiency, and the conversion of resource endowments into more sustainabledevelopment, increased prosperity, and greener growth. Opportunities also exist toaddress persistent political and security conflicts through engaged cooperation andinstitution building.This report proposes four areas for further analysis, debate, and action: 1. “Getting our own house in order” focuses on responses within and among the EU, the United States, and Canada. These include doubling resource efficiency in less than 20 years; working together to transition toward sustainable energy systems; coordinating efforts to properly price resources byviii Transatlantic Academy

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reducing unsustainable subsidies and pricing carbon and resources; rethinking our ideas of “the good life” and economic growth based on ever-increasing resource consumption; working together to resolve disputes in the transatlantic neighborhood; and reinvesting in global leadership by ratifying treaties and reforming transatlantic and global institutions. 2. Engaging “the wider Atlantic” seeks to expand the common notion of transatlanticism where resource issues are concerned, and draws inspiration from the observation that the Atlantic Basin — North and South — is endowed with substantial reserves of energy fuels and minerals, and opportunities to increase sustainable agricultural production and food security. Early-stage projects might include establishing knowledge centers for coordinating mapping of resources reserves and extraction rates and agricultural production, fisheries management, and water trends. Other initiatives may include improved coordination of development and technological initiatives, such as new biofuels. Finally, a host of inter-state disputes and transnational security challenges need sustained, high level attention. 3. “Working with new players” offers ideas about how to better integrate transatlantic interests and concerns with those in rapidly growing developing countries and the many critical resource exporting states. Transatlantic leaders must redouble their efforts to engage China and India across the spectrum of resource nexus challenges. Secondly, public and private actors in the transatlantic region have a host of shared interests in better integrating emerging market states and firms into effective institutions for supply chain management and a host of schemes for increased transparency, certification, and standards harmonization. Finally, engaging the new players offers opportunities to enhance cooperation on related security challenges. 4. “Strengthening global cooperation” argues that transatlantic actors must reinvest and reinvigorate some aspects of global institution building to address resource-related challenges. Such efforts should be directed at knowledge creation and globally-networked, participatory governance. Priorities include an international data hub to provide harmonized data on different aspects of the resource nexus; a global food and water facility of helping to increase capital investments to expand food production, clean water, and sanitation; a network of training centers directed at resource management; guidelines on land-use governance; networks for global policy learning for the improved governance of cities; and the establishment of global, multi-stakeholder forums in collaboration with regional forums to raise the profile of the challenges associated with resource nexus governance.The Global Resource Nexus ix

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Chapter 1Resource Scarcitiesin a Changing WorldA gainst a backdrop of intense, often quarrelsome, disputes about the impact of growing demand for natural resources and global warming on national and international politics, four realities must be acknowledged.• First, global resource consumption seems likely to grow substantially in the decades ahead, as billions of people move out of poverty and toward higher consumption lifestyles more like those enjoyed by most in the transatlantic community. The potential for disruption of international markets and supply chains is likely to rise, which would affect the transatlantic community directly.• Second, unless there is a reduction of poverty levels in the most populated regions of the world, political mayhem, including violence and mass migration, is more likely to grow and intensify both within nations and across international borders. The international community has firmly established global poverty reduction as one of the signature goals of the 21st century, including reforming global institutions as a necessary step.• Third, unless there is a major reduction in global emissions of carbon dioxide and other forms of increasing environmental pressure, major negative environmental changes, including biodiversity loss, are inevitable and they will continue to accelerate toward levels that may well be unmanageable.• Fourth, while binding international agreements on how to manage potential dangers posed by these trends remain elusive, governments are investing billions of dollars in security measures to hedge against a number of troubling contingencies. These include potential shortages of key resources including energy, minerals, food, and fresh water. They are also making plans in the event of conflict with neighbors over access to resources and the expected growth in large-scale immigration. Rising sea levels pose an existential threat to low-lying island communities such as the Maldives and Kiribati. Norway and other arctic powers are investing in coast guard sea and air systems just in case a scramble for arctic oil, gas, and minerals gets underway.China features prominently in many of the current disputes about resources. Anaval arms race is underway in the Indo-Pacific region as the littoral states engage indisputes, some violent, over offshore fishing and energy resources. China’s neighbors,The Global Resource Nexus 1

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who depend on rivers that originate in that country are worried about retaining wateraccess, given China’s needs and plans for these water resources.Ethiopia and Sudan want to build dams on the Nile to generate electricity. Egypt hasmany times stated that if upstream countries interfere with the Nile it could be a casusbelli. African countries that have leased large tracks of land to Chinese, Indian, SouthKorean, and Saudi Arabian companies worry that their own food supplies may be injeopardy. Europe is concerned that the Arab uprisings in North Africa and the MiddleEast sparked in part by rising food prices and political repression will intensify illegalmigration.In North America, there are well-funded campaigns to both develop and opposemore indigenous energy production, including shale gas, heavy oil, and offshoreoil and gas. Demand for electricity and fresh water in the Gulf continues to growat unprecedented rates. This has increased the appeal of nuclear power despite theaccident at Fukushima and the fears that Iran’s nuclear program has a military focus.The range of potential risks and uncertainties relating to a single resource ismagnified when the links between different resources are taken into account. It is this“resource nexus” that provides the focus for this report.1 At the time of writing, SouthSudan provides an excellent example of the nexus of energy, water, food, and land.Armed conflict has already erupted between South Sudan and Sudan over the landand oil fields along their shared border. South Sudan lies in the upper reaches of theNile, which provides water supplies crucial to Egypt’s existence, and yet South Sudandoes not participate in the river basin management institutions. It wants to developa large commercial agricultural sector by selling land to corporate investors. Thismay disrupt water supplies to downstream states as well as the traditional land tenuresystems within South Sudan.These and other seemingly threatening realities also provide opportunities andstimuli for societies and businesses to seek better ways to manage natural resources,through enhancing resource efficiency, adapting lifestyles, reducing carbon emissions,and alleviating poverty. With its wealth, technology, and global industries, thetransatlantic community is well placed to play a leading role in such innovation.1 A number of recent studies have influenced our thinking on the resource nexus and broader resourceissues, including S. Bringezu and R. Bleischwitz, eds., Sustainable resource management:Global trends,visions and policies (Sheffield: Greanleaf Publishing 2009); P. Collier, The plundered planet: why we must,and how we can, manage nature for global prosperity (Oxford: Oxford University Press 2010); GermanAdvisory Council on Global Change, “World in Transition – A social contract for Sustainability,” WBGUReport (2011); H. Hoff, “Understanding the Nexus (Background paper for Bonn 2011 Conference: TheWater, Energy and Food Security Nexus),” Stockholm Environment Institute Report (2011); M.T. Klare,The race for what’s left: the global scramble for the world’s last resources (New York: Metropolitan Books2012); McKinsey, “Resource Revolution: Meeting the world’s energy, materials, food, and water needs,”McKinsey Global Institute Report (2011); S.-A. Mildner, “Konfliktrisiko rohstoffe? (Potential conflicts fromresources?),” SWP & DGAP Report SWP-Study S05 (2011); PBL, “Scarcity in a sea of plenty?,” PBL-Nether-lands Environmental Assessment Agency Report 500167001 (2011); United Nations Secretary-General ‘sHigh-level Panel on Global Sustainability, “Resilient People, Resilient Planet: A future worth choosing,” UNReport (2012); World Economic Forum, “Water Security: The Water-Food-Energy Nexus,” WEF/Island PressReport (2011); World Economic Forum, “More with less: Scaling sustainable consumption and resourceefficiency,” WEF Report (2012); D. Yergin, The quest: energy, security and the remaking of the modernworld (New York: Penguin Press 2011).2 Transatlantic Academy

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So What’s Different this Time?Concerns about supply, access, and overuse of resources are not new. The 1970s sawan extensive discussion of resource scarcity, bringing together concerns about globalpopulation growth and anxieties over growing resource interdependence magnifiedby the oil crises and Western concern about Soviet power. Some of the themes intoday’s resource concerns parallel these earlier debates on “limits to growth,” as manyanalysts still rely on linear trend analysis and Malthusian fears about populationgrowth, while others suggest markets and new technologies will change or transcendecological limits.So what is different now? One significant difference is that earlier worries oftenrevolved around the notion that resources were physically scarce — that they would“run out” in the not-too-distant future. While some contemporary analysts stillbelieve this, most do not. Demand for all resources is indeed expected to increaseover the coming years and decades.2 But evidence suggests that there is enough oiland natural gas — and coal and uranium — to continue powering industrial growthfor decades or even centuries. Similarly, minerals from iron ore to rare earths existin reasonably plentiful supply, with some uncertainties for a number of so-calledcritical materials.3 The shortage of land, water, and food is probably more serious.However, it is not the physical amount of such resources that cause them to beglobally scarce. The challenge is to govern the access, to allocate and to use them inthe most sustainable manner; in other words, to govern resources across countriesand companies within the absorptive capacity of the planet. Failures to do so existeven in our own communities, for example, the failure to complete European internalmarkets for electricity and natural gas or the struggle in southwestern Texas betweengas companies and farmers over scarce water.Three categories of such changes help to understand the ways that emerging resourcenexus concerns are different from earlier debates: 1) The structure and trends in theglobal economy, 2) the structure and trends in world politics, and 3) the scale and rateof global ecological change. These three are discussed in turn below.In the ten years before the 2008 financial crisis, the world economy almost doubledin size in purchasing-power parity (PPP) terms, with annual real GDP growth ratesin the range of 3-4 percent. Rates of growth varied greatly and were greatest in Southand East Asia. These changes are reflected, for example, in the expansion of the G7to a G8 that includes Russia and a G20 that adds the EU and Turkey, as well as Asianmembers (China, India, Indonesia, South Korea), Latin America states (Argentina,Brazil, and Mexico), South Africa, and Saudi Arabia. The G20 thus represents about85 percent of the global economy. This economic growth was assisted by a rapidexpansion in world trade, which saw the value of global trade rise three-fold from2 For example, forecasts suggest that over the next 20-25 years, average annual rates of demand growthmay reach 1 percent for energy, 2.5 percent for minerals, 1.7 percent for food, and possibly as high as3.5 percent for water. International Energy Agency, “World Energy Outlook,” IEA Report (2011); Food andAgriculture Organization, “Anticipated trends in the use of global land and water resources,” FAO ReportSOLAW Background Thematic Report – TR01 (2011), <http://www.fao.org/fcit/fcit-home/en/>; Hoff,“Understanding the Nexus (Background paper for Bonn 2011 Conference: The Water, Energy and FoodSecurity Nexus),” Report, p. 10.3 R.L. Moss, et al., “Critical Metals in Strategic Energy Technologies: Assessing Rare Metals as Supply-ChainBottlenecks in Low-Carbon Energy Technologies,” European Commission Joint Research Centre (JRC), Insti-tute for Energy and Transport Report (2011); US Department of Energy, “Critical Materials Strategy,” DoEReport (2011), <http://energy.gov/sites/prod/files/DOE_CMS2011_FINAL_Full.pdf>.The Global Resource Nexus 3

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US$5.5 trillion in 1998 to $16 trillion in 2008.4 This trade greatly enhanced the degreeof interconnectedness between countries in the same region and between differentregions. The widespread economic growth has not only improved income andlivelihoods but has led to a globalization of western lifestyles. The resulting surge indemand has stretched the ability of supply chains and of governance institutions tokeep pace.The emergence of new political actors in the international arena, including statessuch as China, Brazil, and India, as well as large private, public, and state-ownedfirms from the global North and South has occurred over the last 20 years. Duringthe previous global resource “crises” in the 1970s, the international political discourseand organizations were dominated by Organisation for Economic Co-operation andDevelopment (OECD) states and, in the case of oil, by Organization of the PetroleumExporting Countries (OPEC) and subsequent attempts at cartel building. Today, anew and dynamic global geography of economic and political power is emerging,one that looks more multilateral and less transatlantic in its axes. The rise of newpowers has been accompanied by a rapid growth in the numbers of countries makingthe transition to market economies and/or more democratic forms of governance.The number of democracies has grown from less than 40 in the 1960s to about 90today, with even greater growth in the openness of markets in the same period.5Such economic and political transitions often include greater political instability,state failure, secessionism, and ideological conflict. Finally, new technology andmedia provide opportunities to improve both collective action and the ability ofgovernments to monitor behaviors.To be clear, “scarcity” cannot be measured objectively. Nor are diverse groups ofpeople and organizations likely to agree on when, whether, how, or why a particularresource is scarce. Thus, the report builds on recent analysis that treats scarcity ashaving multiple dimensions, or nodes, of debate (cite PBL, 2011 report). Our analysisdistinguishes five such dimensions: physical, economic, political, environmental, andequity. Certainly, each dimension is related to each of the others, but articulating eachdimension separately helps to capture the complexity and contradictions at work indebates, conflicts, and cooperation around resources. In general, this report agreeswith many recent analyses that most critically important resources are not, in a globalsense, geo-physically scarce. In other words, there are few signs that human will “useup” all minerals, fossil fuels, or water. Rather, as argued throughout, most resourcesare asymmetrically distributed around the globe and scarcities are most often revealedin the other four dimensions, and associated in some way with aspects of governance.The human impact on the global environment and the earth system as a whole is nowlarge enough to denote a new geological epoch: the Anthropocene.6 Humanity is nowa geophysical force, as influential on the earth as other major ecosystem functions.The scientific literature is filled with such indicators, including those related toCO2 emissions, land-use change, annual earth moving, water use, biodiversity loss,4 World Trade Organization, Statistics database. 2012, WTO.5 M.G. Marshall and B.R. Cole, “Global Report 2011,” Center for Systemic Peace Report (2011).6 see, e.g., P.J. Crutzen, “Geology of mankind,” Nature 415/6867 (2002) pp. 23-23; W. Steffen, et al., “TheAnthropocene: are humans now overwhelming the great forces of nature,” AMBIO: A Journal of the HumanEnvironment 36/8 (2007) pp. 614-21; J. Zalasiewicz, et al., “The Anthropocene: a new epoch of geologicaltime?,” Philosophical Transactions of the Royal Society A: Mathematical, Physical and EngineeringSciences 369/1938 (2011) pp. 835-41.4 Transatlantic Academy

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river damming and a host of rapidly accelerating indicators of product and resourceconsumption. The Anthropocene concept suggests that humans cannot persist onbusiness-as-usual paths through the 21st century because the stress on the globalecosystem and its many life-sustaining functions is simply too great. Unless peoplechange their behaviors and modify their lifestyle expectations, nature itself willconstrain the human race with unpleasant consequences for the planet, especially forthe poorer populations of the world.Today, resources are high priority concerns in all levels of government, corporateboardrooms, and local communities. Fears about resource prices and access areback in vogue. Some concerns are long-standing: oil supplies and dependence onthe Persian Gulf region; the relationships between resource competition and war;agricultural productivity, food costs, and questions about the ability to feed a growinghuman population; deforestation; and freshwater supplies. Other stories are newer:the political, economic, and strategic impacts of rapidly growing resource demandsfrom the economically dynamic parts of the developing world; shale gas reservesand the technologies and practices to extract them; the relationship of “green”technologies to minerals mining and markets; and the concerns about Chinesedominance of rare earth metals production. A new era of resource nationalismmay be emerging. This report looks at these issues in a new way by focusing on thegovernance of the resource nexus.The Resource Nexus Approach:Understanding Challenges and Finding OpportunitiesThe resource nexus comprises the numerous linkages between different naturalresources and raw materials that arise from economic, political, social, and naturalprocesses. In this report, we focus on the nexus of water, energy, minerals, food, andland.Numerous studies analyze scarcities of single natural resources in detail. Internationalorganizations, and an array of other public, private, and civil society sector analysts,produce massive quantities of information about the trends and host of challengesassociated with particular resources. Such research often develops priority listsof concerns in hopes of stimulating additional research, technical and processdevelopments, or policies to address identified concerns. Some research alsocontributes to improved understanding of the relationships between natural resourcesand social problems or development and to establishing periodic assessments of thestate of knowledge around particular challenges, as seen with the IntergovernmentalPanel on Climate Change (IPCC) and the Millennium Ecosystem Assessment or therecently established International Resource Panel.More recently, a few explorations analyze the complex connections between multipleresources, their related trends in supply and demand, and the myriad connectionsof these to social, economic, and political institutions. These attempts to grapplewith the linkages among multiple resource issues is the nexus approach. Someare well known, like the linkage between agriculture, food, land-use, and waterin the production of biofuels. Yet, much analysis and policymaking about theseconnections takes place without attention to the large and growing demands onfresh water supplies made by energy production and mineral and energy extractionand processing. Furthermore, environmental challenges such as climate change andThe Global Resource Nexus 5

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ongoing economic volatilities make the whole set of relationships more uncertainand less predictable. This is especially relevant given the changing political dynamicsof the international system including the rise of emerging economies such as China,India, and Brazil.Acknowledging the resource nexus provides a more integrated view, allowing us tobetter understand resource-related questions that would be difficult to answer inthe more traditional pillared or “stove-piped” approach. The nexus approach, bycapturing the interconnectedness of resource challenges, may also offer additionalopportunities to improve such use, via efficiency gains, substitution, reuse andrecycling, reduced consumption, and a host of other options. At the same time, itlowers the risks associated with trying to govern resource concerns in isolation.For example, biofuels policymaking demonstrates that governance choices madein Washington, DC, and Brussels can have effects at local and national levels wellbeyond the transatlantic region. Moreover, understanding the nexus and strugglingwith its implications is likely to become more important over time, as climate changeand biodiversity loss put more ecosystems under stress while global demand forresources and most finished goods continues to grow.This research conceptualizes the nexus as a set of interactions, including importantdrivers of existing and future risks, threats, and opportunities. While the nexusapproach conceivably includes all resources, this analysis focuses on five essentialresources: water, energy, minerals, food, and land. The nexus approach also includesphysical and social/institutional connections. Human needs all require bundles ofresources — for food, shelter, and so on. Human aspirations as they are played outcurrently require far more resources. Even the most acute demand — for freshwater— usually is connected with energy to produce and transport the water as well aswith physical distribution systems. In more general terms, resources serve as direct orfunctional inputs in the production process of another resource, or they can substitutethe use of another resource. Indirect effects also have to be taken into account: claimsfor one resource can compete with other useful demands (think of land used eitherfor the production of food or for bio-energy). The ecological nature of the resourcenexus thus stems from the geo-chemical-ecologic conditions as well as from theirsocio-technological-economic-political contexts. These dimensions are intertwined atmany levels of social and ecological structure.Figure 1 shows the many ways in which resources interact. Some nexus issues maybe more obvious than others to various audiences, as the connections between foodand water suggest. Water is an essential input for any means to produce useful formsof energy and materials; so is energy to produce food beyond subsistence level, totransport water to customers and end-users, and to extract and transform minerals.Minerals, in the form of fertilizers, are indispensable for modern forms of agriculture,and they are needed to produce electricity and energy services. Modern water systemsalso depend on utilizing minerals for production and distribution. Note that all theseresources have a huge dependence on land — very high for agriculture and drinkingwater, far from being negligible for energy and minerals. Finally, the relationship ofeach of the groups of resources, included in the nexus figure, relative to land adds afurther layer of complexity. Minerals and energy systems make demands on land andits uses and, to some extent, may compete with water and food security as land useschange. Likewise, competition between various land uses is driven by urbanization,6 Transatlantic Academy

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Figure 1: The Resource Nexus growing agriculture demand, the need for some environmental and habitats protection, and a host of other issues. Sustainable Lifestyles and Sustainable Livelihoods There are some uncomfortable realities about the consumption of natural resources that underlie this report. While most people in the transatlantic community lead very comfortable lives, much of the world’s population struggles to procure even the most basic requirements of food, water, and fuel. “Biopoverty,” or the lack of access to sufficient basic commodities, is a significant social, political, and moralSource: own compilation, PBL 2011 challenge.7 Hunger and lack of clean water are the greatest healthrisks to humans. Hunger kills more people than AIDS, malaria, and tuberculosiscombined. Most of the hungry live in Asia, but as a percentage of population, sub-Saharan Africa is worst hit. Lack of clean water, meanwhile, is the leading cause ofillness and death globally, with more than 3.5 million yearly deaths coming fromwater-related diseases. Also, an estimated 1.45 million premature deaths occur fromhousehold air pollution caused by burning traditional biomass. By contrast, anaverage of about 55,000 deaths is recorded as the result as victims of civil wars andinterstate wars.8The high level of consumption of natural resources in the global North cannotbe delinked from hunger, water shortages, and energy insecurity in even theremotest corners of the global South. At the same time, the perspective of some3 billion consumers entering the middle class globally in the next years to comedoes raise a number of questions on what lifestyles these people may chose, howthe transition is managed, and what the consequences are. Against the backdrop ofglobal environmental change, globalization, and urbanization, the resource nexushas implications both for lifestyles and livelihoods. Just as there is no circumventingthe reality that the transatlantic community must come up with more sustainablelifestyles to lower overall resource use, it is also clear that the livelihood strategies forthe most marginalized in the world must become more sustainable right now in orderto cope with the resource scarcities they face.If people accept that “more is not always better” — at least for material resourcesand products — there is a need to change behaviors, values, metrics of progress, and7 D.W. Roberts, Global governance and biopolitics: regulating human security (London: Zed Books 2010).8 http://www.genevadeclaration.org/fileadmin/docs/GBAV2/GBAV2011-Ex-summary-ENG.pdfThe Global Resource Nexus 7

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policies, to organize politics so as to use less and still live better, and to decouple ofnotions of economic growth from ever greater use of resources.Governance MattersA central argument in this report is that most resource nexus challenges arise frominadequate governance or disagreements about governance, and that solutions toaddress these challenges lie in adapting existing governance institutions or creatingnew ones. Governance means not just the world of states, but also a broad setof actors and social institutions, from individual NGOs, firms and internationalorganizations, to norms surrounding particular behaviors or processes. Thus,governance happens within and between states, but it also happens within andbetween firms and among firms, states, NGOs, and citizens. Some analysts focusmore attention on the institutional dimensions of such governance, exploring theinstitutions of transboundary water management, for example.States remain the repositories of the greatest amount of governance authority. Butthis is only true, of course, where states function reasonably effectively. Resourcegovernance, from global to local, includes a significant set of challenges related toweak, failed, and generally ineffective states. This adds two elements to the debate:multi-level governance meaning that the local, regional, national, and internationallevels interact, as well as poly-centric governance meaning that usually many centersof decision-making exist that can exert power over neighbors and other actors.9The source of the nexus challenges lies primarily in governance. Across the manygovernance challenges associated with the resource nexus, we highlight the followingthreats that face the transatlantic community and the rest of the world over the nextten years or so:• Economic costs: price volatility and high prices affect populations and industries in developed and developing countries. Poor and marginalized groups may be unable to afford the energy or food they need, and the profitability and competiveness of industries lower down the resource value chain can be undermined.• Ecological destruction: badly managed urbanization and industrialization, accompanied by poor practices in the production and use of natural resources, causes the degradation and destruction of other resources. These impacts almost certainly accumulate and lead to intensified pressure on environmental capacity.• Violence and political conflicts: resources can trigger or fuel violence between states, non-state actors, local and national communities, and individual citizens.9 The central point of the “governance turn” of recent years is indeed to get beyond the state and call atten-tion to the interactions between organizations, institutions, and individual actors among the public, private,and civil society sectors. This notion of governance includes states and their policymaking, of course, butit also includes the myriad ways that groups of individuals or firms organize themselves (or are organizedby others) to shape goals, practices, and ideas. As such, governance includes public-private partnerships,cooperatives, corporate social responsibility initiatives, sectoral standard setting, and campaigns to changenorms and ideas. While some aspects of governance may be state dominated, others will endeavor tokeep state involvement at a minimum. Since almost all resources are part of market transactions untilthey reach final consumers (some local biomass used for energy purposes being one of the exceptions)or end as waste in whatever form, the way of how markets are governed is decisive for the resource nexus(chapter 2).8 Transatlantic Academy

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Bingham Canyon copper mine, largest man-made hole in the world, Utah, United States Socio-ecological changes help terrorist groups to gain new supporters and to hide in places where surveillance is poor.• Poverty and human degradation: Effective and innovative uses of the earth’s resources have long been a basis for human survival and progress. Failure to meet the nexus challenges assessed in this report suggests disastrous results for huge numbers of individuals and communities. It creates inter- and intra-generational tensions over equity.Although many of the triggers and escalating factors for these threats may be regionalor global in nature, the scale of the impact is often local.These challenges provide opportunities as well as threats. Tight commodity marketsoffer business opportunities for saving material purchasing costs and to innovate.The resource nexus also offers synergies between energy, water, and other resources.Comparing the United States with Europe, it seems that the strategy of resourceefficiency is high on the European policy agenda, while it is largely absent acrosslarge parts of the United States (with huge variations across countries and states).The EU has established resource efficiency as one of their seven flagship projectsfor their 2020 agenda, and it also has manifold tangible programs and initiatives onthe ground, though it still has difficulty setting binding energy efficiency targets.Yet market volatility, the frequent lack of transparency and openness of manycommodities markets and poor governance deter the investments and innovationsneeded, absent better governance. There needs to be much more stringent effortsto unleash resource efficiency on all relevant markets both in the transatlanticcommunity and internationally. With proper policies in place, the 95 resources-dependent countries that exist worldwide could potentially turn their endowmentsinto development opportunities for the world’s billion poor people. High commodityprices also have spurred technological development and created new energyresources, ranging from offshore oil fields to unconventional gas.These diverging global changes are accompanied by two mechanisms that makegovernance even more challenging. First, global drivers can become more importantthan local drivers in systems such as river basins, agriculture, and regionaleconomies. This may reduce the resilience of long-standing mechanisms and leadto ungovernable spaces. Second, increasing connectivity allows local turbulencesThe Global Resource Nexus 9

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to spread farther and faster, with greater risks of unintended side-effects on otherresources and regions.This report identifies a range of options for improving the governance of the resourcenexus and these options are underpinned by two premises. First, the transatlanticcommunity has a relatively good track in playing a leadership role in designing andimplementing international governance institutions of different types. Second, itis probably neither useful nor feasible to create a new global institution to directlygovern the world’s natural resources. Rather this report identifies a number ofincremental innovations as well as a need to support more strongly certain existinginstitutions, both old and new. The transatlantic community can take a lead byestablishing shared approaches to enhance resource efficiency, and by the U.S. Senateratifying the UN Convention on the Law of the Sea (UNCLOS). Steps are neededto set up new global and regional data hubs and new networks for sharing bestpractices in resource efficiency. The transatlantic community should reach out tonewly emerging nations to support recent initiatives on transparency and certificationas well as long-established institutions for resource sharing such as river basinagreements.Aim of this ReportThe aim of this report is to highlight the complexity of the resource nexus and thechallenges, physical dangers, and great opportunities that the planet faces over thecoming years and decades. Precisely because the scope of the subject is broad anddiffuse, the report presents an overview of the subject matter using a number ofpertinent examples and develops a framework for policy analysis, policymaking,and strategic management. This study does not set out to resolve any particular setof problems but rather to identify areas of particular concern as well as to makegeneral policy recommendations that make sense for the transatlantic communityitself and for its outreach to other global actors. In identifying a potential leadershiprole for the transatlantic community, this report captures the shared norms andidentities between European and North American nations, while also addressing thecontrasting perspectives that characterize the resource policy discourse on either sideof the Atlantic.Some of the most immediate and troublesome resource issues concern the crisesin the Middle East over access to oil, especially from the Gulf and the dire foodsecurity situation in Eastern Africa. These crises obviously demand the attention ofdecision-makers. Rather than add to an already extensive government, think tank,and academic literature on the these subjects, this study looks at a longer time-frameof ten years or so where it identifies not only new potential crises over resources butalso points to some encouraging new opportunities to innovate and manage resourcescarcity with better governance, new technology including information technology,new business models, and greater transparency between governments, majorcompanies, and individuals.The report also makes the case for expanding the idea of the transatlantic community,which has historically revolved around the North Atlantic countries, to includethe growing important countries of South America and West Africa, which bringstogether a greater Atlantic arena termed the “wider Atlantic.” Although suchcollaboration would not, by definition, be based on shared norms and identities in10 Transatlantic Academy

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the same way as the transatlantic community of the North Atlantic, the littoral statesof the wider Atlantic basin should seek to cooperate to pursue practical measures toimprove the governance of the resource nexus and the management of other securitychallenges that affect all states involved. In addition, and of comparable relevance, thereport underlines the necessity to cooperate with key countries such as China, Russia,India, and others.Three Realms of the NexusThe report presents a framework for understanding the resource nexus, whichidentifies three “realms” of the nexus:• A nexus driven by markets at local, but predominantly regional and global levels in interaction with respective policies (Chapter 2).• A nexus driven by strategic state interests, usually at an inter-state regional level (Chapter 3).• A nexus at the local level with similar characteristics in different locations and with potential for escalation to large scales (Chapter 4).Although each realm of the nexus is defined by certain characteristics, overlapsbetween the realms exist, as do interactions.The report first examines the new market geography brought about by increaseddemand for commodities and the pressures these place on existing institutions ata time of discord among the major economic powers concerning the “rules of thegame.” Many new exporters have entered commodity markets lately, especially fromAfrica and Asia. Both risks and opportunities in those markets can be analyzedalong the lines of three “I”s: market Integration, Information, and Internalization ofnegative externalities (referring to the environmental dimension). Chapter 2 showsthat cumulative risks along these three dimensions can lead to increasing pricevolatility and increasing prices, increasing illicit trade of commodities as well as toungovernable spaces in dozens of countries — all with repercussions in our partof the world. However the transatlantic community could better unleash businessopportunities of resource efficiency and improve the markets domestically andinternationally. Without an explicit international dimension, resource efficiencystrategies face an uphill battle against existing distortions and unfair competition.Along these lines, Chapter 2 argues:• Ongoing policies on transparency and due diligence should be better coordinated between the United States and the EU. Political roadmaps along existing initiatives such as the Natural Resources Charter and the Mining Model Agreement for Sustainability offer the chance of translating natural endowments into real wealth for more than 90 resource-exporting countries.• The United States and the EU face major challenges at home to make their own markets function better; for example, through completion of the internal markets for electricity and natural gas in Europe or the removal of perverse subsidies supporting agricultural commodities in the United States and Europe.The Global Resource Nexus 11

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• Since the resource nexus involves different resources, a new market paradigm should move beyond simple questions of access and supply and instead adopt a life-cycle view on using resources in the most sustainable manner. Getting the prices right will certainly trigger innovations along whole value chains. In addition, active support for technology development and for transition strategies should be at the heart of transatlantic policy coordination.In response to the strategic implications of growing competition and potentialconflict over key resources among the major powers, while contemporary concernsabout access to Persian Gulf oil and the crisis of famine in Africa command the mostattention of decision-makers, focus is needed on the longer term conflict potential ofresource struggles in disputed off-shore areas and along the great rivers of Asia andAfrica. Among the conclusions presented in Chapter 3 are the following:• Within the Atlantic community, conflict over the ownership and access to the potential resources of the Arctic and the Eastern Mediterranean has so far been averted. But the stakes in both cases are sufficiently high that careful monitoring of these regions is necessary to prevent a “scramble for the Arctic” or a serious confrontation in the Mediterranean over disputed access to off-shore natural gas.A large cargo container ship sails into port• The most likely regions for conflict over off-shore resources including oil, gas, minerals, and fish are the Persian Gulf and the China Seas. Most countries of these regions are spending billions of dollars on weapons and other security systems to assure or deny access to the bounties that exist or are believed to exist.• Over the next decade, problems of access to adequate fresh water from the great rivers of Asia and Africa may become as serious as the current preoccupation with fossil fuels. Part of the problem is that China controls the Tibetan plateau, which is the source for the rivers essential for South and Southeast Asia. Asia needs huge amounts of fresh water for food, industry, and energy and there is no permanent institutional mechanism in place to resolve outstanding disputes about rights.• Climate change, especially abnormal weather and sea-level rising poses a huge threat to sea coasts and land areas affected by drought. Forced migration on12 Transatlantic Academy

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a massive scale is possible and, fearful of such migrants, countries are taking precautions to protect their borders with fences and intrusive security measures.Classic strategic concerns must be supplemented by recognition of the emerginghuman security challenges at the local level. The daily struggles for resources in localcontexts, such as fetching increasingly scarce freshwater, growing food on ever scarcerland, and securing fuel for cooking, impact billions of humans. Far more than simplyan “over there” problem, the nexus on the ground manifests itself to the transatlanticcommunity in the form of migration, propensity for violence (including terrorism),and local conflicts that can escalate to wars of global concern. Moreover, the problemsof resource allocation and competition are increasingly being concentrated in theburgeoning megacities of the world, and this dynamic presents a host of novelgovernance challenges — including for the transatlantic community. Key points fromChapter 4 include:• Environmental change, in particular climate change and loss of biodiversity, and urbanization will be major drivers of the conflict over natural resources at local and regional scales. Changing land tenure norms, and marginalization of agricultural lands due to the effects of climate change and overuse, will further inhibit local food production and will result in growing environmental migration. Subsistence crises will impact far more humans than large-scale famines, and therefore will be a growing concern for policymakers.• The world faces an urban future, in which the key sites for competition over natural resources will increasingly be within and among cities. The ill-effects of structural changes will be disproportionately born by slum dwellers in the global South. In an interconnected, globalized world, these ungovernable spaces pose a distinct set of challenges not only for the Indias and Brazils of the world, but also for institutions within the transatlantic community.• While the prospects for interstate conflict over resources are very real, an even greater likelihood is for multiple, concurrent, ongoing “small wars” in which resource conflicts become mapped upon inter-ethnic, tribal, and illicit trade syndicate dynamics.The Global Resource Nexus 13

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Chapter 2Managing MarketsUnder StressA New Market GeographyO ver decades, the well-established markets for natural resources could by and large safeguard access, open new fields, develop new technologies, and allocate the materials needed to meet the various demands.10 Marketshave demonstrated their ability to cope with shocks, such as during the oil crisesof the 1970s, that were superseded by a long-lasting period of low prices for allcommodities. Yet there are also examples of improvements to be made in existingmarket structures. Many of these relate to trade barriers, industry protection policies,and the failure to properly address negative externalities such as greenhouse gasemissions and other forms of pollution. The overall efficiency to use resources alonginternational value chains offers plenty of opportunities that are largely yet untapped(see Figure 4).Then there are additional challenges ahead. Future prospects indicate a long-lastingperiod of stiff competition for natural resources, perhaps over a few decades, whichwill be characterized by both high volatility and increasing prices. It is expected thatthe resource nexus translates into environmental restrictions and higher costs forextracting and transforming materials for industry. The markets for fuels, metals, andagricultural goods interact more frequently than in the earlier years, with additionalinteraction with local water and food markets. This is partly driven because newsolutions to access new natural resources increasingly interfere with other resources.To give an example, extracting unconventional gas resources requires significantamounts of water, and in areas where water supplies are scarce this has lead tostruggles between gas companies and others, like farmers, who would like to use thatwater.For sure, these challenges are accompanied by opportunities. High commodity priceshave spurred technological development and created new energy resources, rangingfrom offshore oil fields to unconventional gas, which comprise an area more thantwice the size of the traditional transatlantic space, with enormous reserves not onlyin the United States and Canada, but also in Brazil, Angola, Namibia, and Argentina.In that same geographical domain, government policies to reduce greenhouse gasemissions in the transport sector and its dependence on oil have incited enormous M. Radetzki, A handbook of primary commodities in the global economy (Cambridge, U.K.: Cambridge10University Press 2008); World Trade Organization, “World trade report 2010: Trade in natural resources,”WTO Report (2010).The Global Resource Nexus 15

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activities in the market for biofuels, with positive and negative effects. Brazilhas enormous food growing potential to supply states in West Africa, where itrecently opened a dozen new embassies as evidence of more intense trade relations.Manufacturing companies and governments are developing strategies towardsimproving resource efficiency. However, without an explicit international dimension,resource efficiency strategies and other opportunities face an uphill battle againstexisting distortions and unfair competition.11The resource nexus and the limits of governance will put the transatlantic communityat risk of being exposed to international security threats and shortages of supply. Anew geography of commodity trade has clearly emerged (see Map 1).12 The weightof the developing world has increased. China’s influence in the minerals and energymarkets is a good example of this new geography. Other striking examples include:• Food import dependencies: • The Philippines is the largest importer of rice, followed by United Arab Emirates (UAE), Saudi Arabia, and Iran. • Mexico and Egypt are among the top importers of maize (Japan being the top importer). • Egypt is the top importer of wheat, with Brazil, Indonesia, and Algeria following behind (after Italy and Japan).• The dominant position of Russia as a commodity exporter (energy and minerals, increasingly so with the opening up of the Arctic) as well as Brazil (minerals, agricultural goods, energy resources).• The growing importance of “new kids on the block”: exporting countries of Africa (oil, minerals), Central Asia (oil, gas), and Southeast Asia (biofuels), with the conundrum that some 95 countries worldwide derive at least 50 percent of their export values from commodities and can be called resource-dependent.• The increasing production capacities in a number of emerging economies (e.g., China, India) for refined materials and key products such as steel and cement, while their capacities to produce food domestically seems uncertain. Comparable to the position of Saudi Arabia, with its huge reserve capacities in the oil market, they can be characterized as “Swing States” because they currently develop huge capacities and whatever happens in their domestic future of materials or agriculture will have significant impacts on international markets. The domestic production of natural gas in the United States and Canada will likely change the international markets.11 R. Bleischwitz, et al., International economics of resource efficiency: Eco-innovation policies for a greeneconomy (Heidelberg: Physica 2011).12 P. Dicken, Global shift: mapping the changing contours of the world economy (Thousand Oaks, CA: Sage2011). The graph displays imports and exports of the following commodities (numbers in brackets refer toUN COMTRADE classification): coal (321), petroleum oils (333), natural gas (343), aluminum (285, 684),copper (283, 682), fertilizers (562), iron ore (282), steel (282, 673, 674, 675, 676), wheat (041), rice(042), maize (044), and fixed vegetable fats and oils (422). Note that major countries and major commodi-ties are included; further research may be able to develop a fully comprehensive map.16 Transatlantic Academy

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Map 1: The New Diversity of Players in World Commodity TradeIt is however worth noting that the EU-27 is the largest importer of fuels worldwide.The United States follows closely behind, but may change this status due to rapidlyincreasing production of domestic shale gas and, eventually, extraction of new oilfields (see Map 1).Large shares of world commodity trade have moved from the transatlanticcommunity and its other OECD partners to the emerging economies and a numberof developing countries. How international trade policy is formulated will be decisivefor the character of future competition. Major players are advocating differentperspectives on how the allocation of resources should be organized. Europe and theUnited States favor a market-based allocation with international rules, an approachthat is supported by the WTO. In contrast, many examples show the dawn of a newage of resource-nationalism: ranging from expropriating foreign companies (as hasbeen the case in Venezuela, Bolivia, and Uzbekistan) to imposing windfall profit taxesand other forms of becoming more possessive over natural assets and establishing astate capitalism with commodities as core business (Russia) or a neo-mercantilism offavoring exports. This global shift and tendencies of resource nationalism in manycountries pose challenges for the management of international commodity markets.Many companies are clearly worried.Over the next years, a global shift in agricultural production towards Latin Americaand sub-Saharan Africa is likely. The transatlantic community has a role to play here:not only should it embrace these trends by opening up consumer markets and cuttingexport subsidies, but existing expertise in agricultural production methods and hugesupplies of recovered phosphorus for fertilizer production could facilitate sustainabledevelopment of the agricultural sector and, in so doing, feed millions of people.Cooperation with Morocco, which has emerged as a main supplier of phosphorusThe Global Resource Nexus 17

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Figure 2: Institutions and Actors for the Governance of Commodity MarketsPolycentric and Multi-Level GovernanceNote: Consumption refers to private households.Source: Transatlantic Academywill be essential. In contrast, large parts of Asia (in particular India and China) willvery probably encounter difficulties in increasing food and water production tomeet their domestic demand, resulting in new security challenges, as Chapter 3 willdemonstrate.13The new geography of bustling commodity markets poses challenges for effortsto coordinate private and public actors on a global scale and along internationalvalue chains. The new challenges comprise three “I”s: Integration, Information, andInternalization of externalities, the latter referring to a well-established principle ofenvironmental policy.14 The stiff competition ahead can only be coped with from agovernance perspective that covers the levels of value chains, states, and actors on theground — a polycentric and multilevel governance15 perspective comprising business,other stakeholders, national governments, international organizations, and theinstitutional mindsets of these actors. Figure 2 illustrates the institutions and actorsand displays the collective goods dimensions along the life-cycle of using resources.13 Food and Agriculture Organization, “Anticipated trends in the use of global land and water resources,”Report.14 Externalities are those costs caused by private activities that are passed on to other actors without beingreflected in market prices; examples are the costs of second-hand smoking or water pollution causedby chemical industry. The seminal paper by R.H. Coase, “The Problems of Social Cost,” Journal of LawEconomics 3 (1960) pp. 1-44., defined the principle of internalization of externalities, and it has been anessential part of all environmental policies since the 1970s; see also W.J. Baumol and W.E. Oates, Thetheory of environmental policy (Cambridge U.K.: Cambridge University Press 1988).15 Defined by V. Ostrom, et al., “The organization of government in metropolitan areas: a theoreticalinquiry,” The American Political Science Review 55/4 (1961) pp. 831-42. Following their analysis of watermanagement systems in California as: “‘Polycentric’ connotes many centers of decision-making that areformally independent of each other.” See also the more recent work of Philipp C. Schmitter on polycentricgovernance.18 Transatlantic Academy

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It pledges a public interest in how resources are used, which can be translated intogovernance strategies.Integration and Dissociated MarketsIn international relations, one usually thinks of the first “I,” integration, as a processof eliminating frontiers between states; market integration eliminates frontiersbetween economies. The elimination of tariffs within GATT/WTO and the creationof an internal market for goods and services in the EU can be regarded as successfulprocesses of enhancing integration. In the business world, vertical integrationdescribes a style of management where a supply chain becomes united throughcommon ownership (e.g. oil, gas, electricity, water, fashion products, and consumerelectronics). In a wider sense, supply chain management — characterized asmanaging an interconnected dynamic network of businesses towards the provision ofconsumer goods with the objective of creating net value — can also be regarded as acase for market integration.For most commodity markets, however, integration is difficult to accomplish. Overthe last decades, resources have basically been traded on markets and betweencompanies. In our globalized world, it takes often more than a dozen steps withnumerous suppliers until a final product reaches the consumer. Despite globalcommunication improvements, markets are dissociated in terms of how the life-cycleof using resources is managed. Efforts to manage resources more efficiently encounterprincipal-agent problems, splintered incentives, and user-investor dilemma thataccumulate over geographical borders and different standards and legislations.16 As aresult, two-thirds of many resources used are wasted.The global commodity markets have accordingly expanded both in terms of physicalvolume and monetary value. The physical volume of traded goods increased by afactor of 2.5 over the past 30 years, with more than 10 billion tons of goods now beingtraded around the globe.17 Non-renewable materials account for more than three-quarters of commodity trade in physical terms, dominated by oil, while renewablematerials that include forest products and agricultural goods account for less thanone-quarter. It is worth noting that international trade of water and constructionminerals is almost negligible because of their more even distribution and hightransportation prices per unit due to their physical properties. In contrast, the shareof metals has increased over the years.As of early 2012, commodity prices were at an all time high. The increases since theyear 2000 have basically erased all the price declines of the 20th century. The winnersare energy and mining companies, especially large corporations with close ties togovernments in China, Russia, and other emerging economies. Many farmers in thetransatlantic community have benefitted from the emphasis on producing biofuels.16 International Energy Agency, “Mind the Gap: Quantifying Principal-Agent Problems in Energy Efficiency,”IEA & OECD Report (2007); S. Sorrell, The economics of energy efficiency: barriers to cost-effective invest-ment (Cheltenham: Edward Elgar 2004).17 Surprisingly little data and evidence exist on the physical dimension of international trade; with bustlingprices it is usually difficult to realize what amounts of commodities exactly have been traded. See e.g. M.Dittrich, “The physical dimension of international trade, 1962-2005,” in Sustainable growth and resourceproductivity: Economic and global policy issues, R. Bleischwitz, et al., Eds (Sheffield U.K.: GreenleafPublishing 2009) pp. 85-98. M. Dittrich and S. Bringezu, “The physical dimension of international trade:Part 1: Direct global flows between 1962 and 2005,” Ecological Economics 69/9 (2010) pp. 1838-47.The Global Resource Nexus 19

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Table 1: The Relevance of Resource-Based Companies in the Top 20Companies Worldwide (by 2011 revenue) Primary Stock Name Market Headquarters Listing 2 Royal Dutch Shell Oil and gas London (LSE) The Hague, Netherlands 3 Exxon Oil and gas New York (NYSE) Irving, TX, USA 4 BP Oil and gas London (LSE) London, United Kingdom 5 Sinopec Group Oil and gas Shanghai (SSE) Bejing, China 6 China National Oil and gas Shanghai (SSE) Bejing, China Petroleum 7 State Grid Electricity Government-owned Bejing, China 10 Chevron Oil and gas New York (NYSE) San Ramon, CA, USA 11 Total Oil and gas Amsterdam Courbevoie, France (Euronext) 12 ConocoPhilipps Oil and gas New York (NYSE) Houston, TX, USA 18 Glencore Int. Commodities London (LSE) Baar, SwitzerlandSource: CNN markets, Fortune Global 500, others.Table 1 shows that of the world’s top 20 companies of all fields and industries,half have resources in their core business. It also shows the high share of Chinesecompanies; companies such as Gazprom (Russia) and Petrobras (Brazil) are becomingmore important too.The losers of price increases are most low-income people and resource-usingindustries, but small-scale farmers and the food markets should not be ignored. Manyfarmers, especially small-scale farmers in developing countries, did not benefit fromprice increases. The resource nexus helps to explain their dilemma: increases in saleshave been eaten up by increasing costs for energy, transportation, and fertilizers. Lackof infrastructure and access to markets as well as corruption remain as structuralgovernance deficits.18 The world’s largest importer of wheat, Egypt, has been facedwith a 38.4 percent increasing import bill from 2009-2010. Although the relationshipbetween high food prices and political unrest is a complicated one, there is no doubtthat concerns about prices have long been a factor in regional and national politics.The conjunction of high prices and a demographic youth bulge is one of the manyreasons the Arab uprisings in 2011 occurred so spontaneously.The case of phosphorus is instructive (see Box 1). While waste water contains a greatamount of phosphorus that can be recovered with state-of-the-art technologies,appropriate incentives are missing and policy integration along the life-cycle ofphosphorus mining, the use of fertilizers in agriculture and other applications, andrecovery from waste water do not yet exist.18 Small farmers’ grievance is mirrored by the estimated 44 million people driven into poverty by rising foodprices into the second half of 2010 (counteracting the trend that the number of people living in poverty fellbetween 2005 and 2008). Note, however, that global poverty statistics are under methodological discus-sion, because of a regional bias towards China (whose a decline in poverty might outperform increases inpoverty in other parts of the world) and difficulties of estimating appropriate purchasing power parities.20 Transatlantic Academy

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Box 1: Phosphorus Phosphorus is an important resource commodity because of its use in the production of fertilizers. Because it has no substitute, it is also an essential component of the resource nexus (mainly food security). In relation to water and water management, phosphorus flows from agriculture to inland coastal waters and it can be recovered from wastewater/sewage sludge. Furthermore, the excess use of phosphorus in agriculture and related water flows cause hypertrophication (depletion of oxygen in the water that may cause fish populations to decline). Recently, phosphorus demand has also been tied to the energy market because of demand for biofuels. Phosphorus prices have long been at rather moderate levels of around $40-50 per ton. However, in 2006 prices began to increase rapidly and peaked at around $400 per ton in 2008. After a drop, prices have started to rise again and have reached above $150 per ton in the third quarter of 2010. The future demand for phosphorus is expected to increase by 50-100 percent by 2050, depending on global food demand and diets as well as demand for bio-energy. Due to the location of reserves and property rights issues, clashes between Morocco and Western Sahara or within Iraq over phosphate could easily escalate. It is necessary to look at the life-cycle use of phosphorus. Researchers estimate that some 50-80 percent of global phosphorus uses are currently lost due to overuse and inefficiency. The high amount of phosphorus in wastewater is due to residuals from human urine and excrements. To date, there is neither any monitoring system nor a comprehensive policy that addresses the optimal use of phosphorus over the life-cycle. Technologically advanced processes allow for very high recovery rates of phosphorus (up to 90 percent by means of mono- incineration). Investments, however, do not yet pay off and require stabile demand expectations towards markets for secondary phosphorus. In total, a nearly 50 percent reduction of import dependencies may be achievable. With emerging technologies (e.g., mono-incineration) there are many untapped opportunities. The transatlantic community should establish a global monitoring system and a global forum for phosphorus and its use, to coordinate sustainable use and market introduction of recovery technologies and to line up with those countries that have huge reserves, i.e. Morocco and other Arabian countries. Figure 3: Phosphorus flows Source: http:// globalpnetwork.net/The Global Resource Nexus 21

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Deficits of market integration also have a time gap: Mining operations need to beplanned years and decades ahead of decisions made by consumers or the final goodsindustry. Preparing a mine for exploitation or developing an oil field in remoteareas requires huge time and financial investments and a lifetime perspective ofapproximately four decades. The time horizons for consumer goods industries andpolicymakers are generally significantly shorter. Fast innovation cycles (e.g., mobilephones) increase the uncertainties for all sides. Mining operations, thus, can hardlybecome aligned with decisions in downstream industries. This becomes aggravatedwhen the resource nexus is considered. Water management in Central Asia (see Box4) can be considered as a case for poor coordination between water and energy needsacross borders.Perspectives for Better Integration:Resource Efficiency at an International ScaleA key requirement for any governance of natural resources is to address the businessdimension of using materials, energy, water, and processing food. Given thatresources have a price (even if negative externalities are not properly accountedfor) and price expectations are generally upwards, businesses do have incentives tomanufacture at the lowest possible material costs.A closer look reveals that the material costs to businesses actually outweigh the pricesof raw materials by far. German manufacturing firms report shares of materials intheir gross production value of 40-45 percent; similar shares have been reportedlately by other European companies lately.19 Accordingly, the potential for cuttingthose costs through process innovation is relatively high. A German program called“DEMEA” reports average savings per company in the order of some €200,000(roughly $260,000), with increases of marginal returns to sales of 2.4 percent. Similarexperiences have been made in the United Kingdom and other EU member states;comparable figures for the United States are not available. The United States, however,spends about $2 billion buying oil and loses another $4 billion indirectly to the costsof oil dependence, oil price volatility, and the costs of keeping military forces ready forany intervention in the Persian Gulf.20Manufacturing companies have strong incentives to get engaged in efforts to savematerial and energy purchasing costs. They will need to consider making resourceefficiency a core element of their strategy and business models. In doing so, they willneed to address various barriers such as the lack of attention, information deficits,availability of financing, and uncertainties about future demand.21 Many of those earlyimprovements will be at the level of individual companies and incremental processinnovation with a payback period of less than one year rather than addressing thewhole life-cycle of products or material flow systems.Good management monitors the flow of materials along value chains to establishmaterial stewardship where by-products could be re-used and recycling offers19 EIO, “The Eco-Innovation Challenge; Pathways to a resource efficient Europe,” DG Environment, Euro-pean Commission Report (2011), <www.eco-innovation.eu>.20 A.B. Lovins, “A Farewell to Fossil Fuels: Answering the Energy Challenge,” Foreign Affairs 91/2 (2012)pp. 134-46.21 EIO, “The Eco-Innovation Challenge; Pathways to a resource efficient Europe,” Report, p. 66; McKinsey,“Resource Revolution: Meeting the world’s energy, materials, food, and water needs,” Report.22 Transatlantic Academy

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tangible benefits.22 The example of the oil industry, where a number of partneringand gain-sharing arrangements to save costs have been established,23 is instructive forother industries. The resource nexus offers potential benefits of reducing operatingcosts through improved internal management of water, waste, energy, materials,carbon, and hazardous materials in an integrated manner. Indeed, this can and shouldbe combined with efforts to reduce environmental impacts. While these strategies willimprove the return on capital, other strategies can improve growth and contribute tobetter risk management:• Guide investment decisions at portfolio level based on resource trends and risk analysis;• Develop new products and services with resource-efficient features able to attract customers; and• Manage risk of operation disruptions (be it from scarcities, climate change, regulatory changes, etc.).24A life-cycle approach helps to identify more tangible benefits and prioritize keyinitiatives such as improving the resource efficiency of buildings, increasing yieldson large-scale farms, reducing food waste, reducing municipal water leakages, andimproving higher overall efficiency rates in end-use products such as vehicles. It isestimated that these opportunities could create societal benefits of up to $3.7 trillionworldwide, with large benefits occurring in developing countries.25 Internationalcooperation pays off. Figure 4 shows a selected number of those opportunities.22 Vertical integration is faced with at least four challenges:1. With good expectations ahead, the mining industry itself tends to favor capital markets rather thancorporate equity or long-term contracts; their interest in vertical integration is low.2. Key players for better materials management in the value chains are refineries and capacity producers.However they are typically medium-sized companies in stiff competition as suppliers to industries down-stream. Even the steel industry has started to raise concerns over market power because of their sand-wiched position between the iron ore industry upstream and the automotive or construction industriesdownstream.3. Usually, supply chain management follows product chains, with the automotive industry being a goodcase. However, actors will also have to find ways to integrate along material flows across a number of prod-ucts, thereby adding elements of horizontal integration.4. Many used products are exported to countries where demand is high but recycling facilities are poor,typically developing countries. According to the International Resource Panel, the end of life recycling rateis above 50 percent only for a limited number of metals such as iron and platinum; for the majority, it islower than 20 percent. As a result, material leakages occur that lower the re-use of many materials. Thegrowing metal stocks in societies are still largely untapped (see Chapter 4).International Council on Mining and Metals, “Materials Stewardship, Eco-efficiency and Product Policy,”ICMM Report (2007).23 Two initiatives were: CRINE (cost reduction in the new era) and PILOT; see e.g.: http://webarchive.nation-alarchives.gov.uk/20101227132010/; http://www.pilottaskforce.co.uk/data/aboutpilot.cfm; http://www.onepetro.org/mslib/servlet/onepetropreview?id=0002672824 McKinsey, “Resource Revolution: Meeting the world’s energy, materials, food, and water needs,” Report;World Economic Forum, “More with less: Scaling sustainable consumption and resource efficiency,”Report.25 The World Economic Forum exemplifies the idea that ambitious businesses will seek to transformdemand through interactions with the consumer and transform value chains through new businessmodels. It is worth noting that emerging economies are on the verge of entering the market for sucheco-innovation. Rainer Walz points to countries such as South Korea and Singapore with emergingcompetences that are providing favorable conditions and high absorptive capacities for eco-innovationtechnologies, while countries such as Brazil and Malaysia show promising specialization for renewablematerials and recycling. R. Walz, “Competences for green development and leapfrogging in newly industri-alizing countries,” International Economics and Economic Policy 7/2 (2010) pp. 245-65.The Global Resource Nexus 23

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Figure 4: Opportunities for Resource SavingsMaterial Flow Analysis (MFA) is a measurement tool that can overcome deficits ofboth integration and information. 26 It measures and analyzes the flow of biotic andabiotic materials (including agricultural goods and energy) across system boundariesbetween the natural environment and the human sphere. Integrating the stagesof production, consumption, and recycling, it offers a comprehensive perspectivefor resource policy. Since Eurostat and OECD have provided handbooks on themeasurement of material flows, and do, in fact, promote the collection of data and useof MFA concepts, there are many opportunities for the transatlantic community andfor industry to use MFA in their strategies. From a resource nexus perspective, landand water should be added.Policies, however, will be beneficial to overcome barriers and to stimulate marketdevelopment in favor of developing new resource-light products and systems. Hybridforms of governance such as agencies with partners from the private sector andpublic-private alliances can certainly help to promote best practices and disseminateknowledge as well as to improve qualification and training. Nevertheless, marketintegration is also a task for national and international policies and in particular forthe transatlantic community. Without an explicit international dimension, resourceefficiency strategies face an uphill battle against existing distortions and unfaircompetition.The strategy of resource efficiency is more advanced in Europe than in the UnitedStates. This is in line with a roughly 30 percent better performance in the EUcompared to the United States (with huge variations across countries and states).26 See e.g. www.materialflows.net; www.is4ie.org; Researchers such as Friedrich Schmidt-Bleek, StefanBringezu, Marina Fischer-Kowalski, Robert Ayres, and others created it in the 1990s to analyze the use ofnatural resources in societies.24 Transatlantic Academy